Red flags for fraud, the F score

Everyone is looking for fraud these days. In fact, people are trying to come up with benchmarks aimed at grading companies on governance and compliance issues for investors and others. You should be aware of what they are looking for. Managing your perception, after all, is a task that cannot be overlooked. Here's an example. Patricia Dechow, an accounting professor at Berkeley's Haas School of Business, has come up with a list of red flags based on her review of SEC releases. She devised a Fraud-Score, or F-Score, to be used by auditors and regulators as a preliminary assessment of "earnings quality." Turns out that companies most likely to cook their books seem to be those with deteriorating performance, unusually high growth in sales but declines in profit margins,   declines in order backlog and employee levels, high increases in off-balance sheet activity. Enron would have had a high score obviously.

For more:
- here's a release